Dueling Editorials- NCBA Versus R-Calf Regarding the Proposed GIPSA RuleTue, 05 Oct 2010 3:47:00 CDT
In the last few days- we have received two editorial pieces from the two cattle organizations that are exactly 180 degrees apart on the proposed marketing rule that USDA has issued from the Grain Inspection, Packers and Stockyards Administration- otherwise known as GIPSA. Comments on the rule are now being accepted by USDA through the 22nd of November. We have decided to provide both of these viewpoints to you in their entirety in this one webstory.
The first comes from R-Calf USA CEO Bill Bullard, making the case for the GIPSA Rule. The second viewpoint is courtesy of Chief Economist of the NCBA, Gregg Doud. He asks the question "Is Average Fair?"
To learn more about the GIPSA Rule- click here for our primer that includes links to the full rule, commentary and conversation from all viewpoints.
Here are the comments- unedited- from Bill Bullard of R-Calf USA- it's entitled "Understanding How the GIPSA Rule Benefits All Cattle Producers."
People in the cattle industry understand that the price of all beef cattle, regardless of their weight, is predicated on the expected future value of the cattle when they are ready for slaughter. Thus, all cattle producers have a vested interest in ensuring that fed cattle are sold into a fully competitive market. Let’s look at how the proposed GIPSA (Grain Inspection, Packers and Stockyards Administration) competition rule (the proposed GIPSA rule) will impact the competitiveness of the fed cattle market.
First, a little background: Fed cattle are sold in the cash market either on a live-weight basis, carcass-weight basis, or on a grid-valuation basis (grade and yield). The price received for cattle sold on a live-weight basis becomes the base price for cash cattle sold on a carcass-weight basis, which is based on the animal’s dressing percentage, as well as those cash cattle sold on a grid-valuation basis, where grade and yield premiums/discounts are added to or subtracted from the live weight price.
Most fed cattle in the cash cattle market are sold either on a live-weight basis or carcass-weight basis, with only a small volume sold on a grid valuation basis. In fact, the average volume of cattle sold under a negotiated grid in the three major fed cattle marketing regions in 2009 was only about 6 percent.
Collectively, these marketing options are considered the cash market, but it is the live-weight cash market that establishes the base price for all cash market transactions. In addition, the price discovered in the live-weight cash market also establishes the base price for the entire forward pricing market, which includes forward contracts, formula contracts and marketing agreements.
In recent years, feeders have shifted out of the live-weight cash market for various reasons, including: 1) they feared not having timely access to the market (timely access to the slaughtering plant); 2) they were not rewarded for quality; 3) they were not making an adequate profit; 4) they could not get financing without a forward contract; 5) the packers would only purchase under a grid system or a forward-type contract; and, 6) they were concerned that the live-weight cash market was overly prone to manipulation. As a result, the entire cash market has shrunk to below 40 percent.
Because many feeders now avoid the live-weight cash market, the live-weight cash market has become too thin to reflect a competitive price, and the market is becoming increasingly filled with average-quality cattle.
So, the problem today, then, is that the too-thin cash market with increasing numbers of average-quality cattle is setting the base price for all cattle, regardless of how they are marketed. Even the highly regarded U.S. Premium Beef (USPB) Market Grid uses USDA’s KS/TX/OK weekly average price as the base price it pays for cattle. USPB then bases its premiums and discounts on the average performance of cattle that National Beef Packing Co. (USPB’s packing plant) purchases in the cash market, not including any USPB cattle.
This is the core problem R-CALF USA is working to address. And, this is where R-CALF USA departs from the packers and their allied trade associations like the National Cattlemen’s Beef Association, the American Meat Institute and the National Meat Association. These groups do not even recognize or acknowledge that it is a problem to have the base price for all fed cattle determined by a too-thin cash market that is increasingly filled with average-quality cattle.
This explains why the reforms R-CALF USA seeks are so controversial. Opponents to the proposed GIPSA rule don’t even agree there is a problem to be fixed and they want to continue down the same path we are on, which happens to be the same doomed path already trodden by the U.S. hog industry that resulted in the exodus of 90 percent of all U.S. hog operations in just the past few decades.
Because the packers and their trade associations do not agree with R-CALF USA that there even is a problem, there is absolutely no chance that the two sides will agree on an appropriate solution.
Cattle producers must decide.
R-CALF USA’s solution to the problem is to first address the reasons that so many feeders are exiting the live-weight cash market to prevent that market from shrinking any further and to re-establish it as an attractive market that feeders may voluntarily decide to re-enter.
To accomplish this goal we must first: 1) stop packers from restricting timely access to the marketplace; 2) stop packers from using deceptive practices to coerce individual feeders to exit the live-weight cash market; 3) stop packers from paying preferential prices to their preferred feeders that are not based on either quality or market characteristics (a practice that keeps the cash market price artificially low); 4) stop packers from procuring cattle from other packers who are not cattle feeders (By purchasing cattle from other packers, packers avoid creating demand in the cash cattle market.); and, 5) stop packers from jointly buying cattle in order to reduce the number of bids for cattle (When multiple packers join together to hire one cattle buyer, competition is eliminated.).
These are the reforms the proposed GIPSA rule will help accomplish, and this is why R-CALF USA strongly supports it. The proposed GIPSA rule will not limit, restrict or prohibit grid pricing, premiums or discounts, value-based marketing, or any legitimate form of alternative marketing agreements.
The packers and their allies are misleading the industry by claiming the proposed GIPSA rule would harm cattle producers because packers would no longer pay premiums for higher quality fed cattle, which would then translate to only average prices for all cattle regardless of quality, including even lighter feeder calves of higher quality. That’s a distraction strategy on their part. The packers, along with their allied trade associations, have initiated an aggressive campaign to convince everyone to focus on their outrageous claim that the proposed rule would eliminate market-based pricing programs. Nothing could be further from the truth! There is no language in the proposed GIPSA Rule that would, in any way, limit, restrict or prohibit the use of legitimate alternative marketing arrangements for cattle.
Instead, the proposed GIPSA rule will help restore the integrity of the live-weight cash cattle market, and doing so will prevent further shrinkage of that market, as well as possibly attracting more feeders into that market.
The choices we have today with the proposed GIPSA rule are: 1) Do we begin taking steps to correct this problem right now? Or, 2) do we wait until the cash cattle market shrinks to less than 8 percent as it has in the near-totally integrated hog industry, or perhaps to nearly zero percent as it has in the totally integrated poultry industry?
The choice belongs to cattle producers. It is theirs and theirs alone to make.
Now- here is the opinion piece from the NCBA and Chief Economist Gregg Doud:
The second oldest sport in the history of the cattle business is beating up on the packer. I’m guessing the oldest involved a cowboy on a horse trying to rope a steer. No one likes the packer, which is actually strange when you think about it because “the packer” is an absolutely necessary entity during “the process” of converting beef with the hide on it to beef without the hide on it. Who likes to eat hide? Whether you call them a “packer,” “processor,” or “middle man” really doesn’t matter. They are always one of several buyers in the marketing chain of our product.
I’m going into this because some are touting this proposed GIPSA (USDA's Grain Inspection, Packers and Stockyards Administration) rule on livestock marketing as a way for producers to settle a longstanding score with the packer. In reality, this rule does no such thing. The fact is this rule actually ends up pitting producers against producers. How do I figure?
Probably the most difficult part of this proposed rule for commonsense folks to swallow is the part about when a third party can decide whether an agreement between a packer and a seller isn’t fair. This rule clearly attempts to provide the ability for that third party to sue, solely based upon an allegation of a lack of fairness. To the packer, and his lawyers, this threat of liability, litigation and risk has a cost. This is a cost that they’re certainly not going to pay if they can possibly avoid it. They’ve already indicated how they’ll limit this exposure, by offering the same standard, average, vanilla contract to everyone.
But there’s an important mathematical fact about the term average. It is that half are above it and half are below it. By dumbing down the procurement of beef — with the hide on it — and mitigating this exposure to risk and liability, additional per head marginal costs of doing business will be injected into the process. GIPSA’s own economic study clearly says the advantage of Alternative Marketing Arrangements (AMAs), or non-spot market transactions, is that they reduce costs and allows the marketplace to operate more efficiently. These savings are then passed on to both consumers and beef producers. The economic term they use in the study is “surplus.”
If packers walk away from these AMAs due to this rule because they’re deemed “risky” by their lawyers, and this is what they’re already talking about, then both this additional risk along with the inefficiencies are added back into “the process.” The result: Consumers pay more for what will very likely be a lower quality product and producers get less for the beef they produce. Cattle producers will be picking up a majority of the tab in the short run as higher marginal costs are added to “the process.” Of course, larger producers can spread these costs across more head of cattle than smaller producers, which hurts the smaller half. The packer’s goal in all of this is simply to extract a margin without exposure to any risk between the arrival at the front door and the departure out the back of the processing plant.
Of course, the half of producers that should really be unhappy about this rule’s government’s mandate for fairness are those producers who have expended significant capital and resources to produce premium and value-added products to meet the demand of consumers in the marketplace. Via this rule, the value of that bull with better carcass characteristics, the additional costs of traceability, a solid business relationship built over time, a brand name, or marketing that lead up to a superior eating experience by the consumer are all at risk. Is that fair?
Capitalists prefer a system that rewards innovation and strives to increase demand so that everyone benefits. Which do you prefer?
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